Luxembourg
Captive Reinsurance Companies
Contents
2 Executive summary
9 Captive solutions in Luxembourg
3 Introduction
4 The advantages of creating a captive
9 Facts and figures
10 Legal framework
10 Technical provisions
11 Actors in the captive business
4 Solution to market inadequacies
4Reduction or stabilisation of insurance
premiums at group level
5Retention of the profits of good risk
management
5Optimisation of financial flows linked to risk
management
6Direct access to worldwide professional
reinsurers
6Better risk management
11 Supervision
11 Administration
12Authorisation procedure
12 Prerequisites for authorisation
12 Summary of the process
12 Preparing the application file
14Tax aspects
7Why use a captive reinsurance
company?
14 Direct taxes
15 Indirect taxes
16 Useful contacts
8 Why choose Luxembourg ?
1
Luxembourg
Captive reinsurance companies
Executive summary
A captive reinsurance company is
• reduction and/or optimisation of risk
a reinsurance company created or
financing costs;
owned by an industrial, commercial or
• retention of underwriting profits;
financial group, the purpose of which is
to reinsure exclusively all or part of the • direct access to the wholesale
risks of the group it belongs to.
professional reinsurance market;
Companies are confronted with an
• group-wide focus on risk financing
escalating number of risks while, at the strategy and servicing provided by
same time, steadily growing corporate
professional insurers.
governance requirements result in
additional rules relating to the tracking The Luxembourg financial centre
provides the ideal legal framework
and management of these risks.
and administrative infrastructure
A reinsurance captive provides the
for captive reinsurance solutions.
following advantages:
With over 250 licensed reinsurance
undertakings, most of which are
• compensation for market inadecaptive companies, Luxembourg
quacies: coverage of some risks that
has become the largest domicile for
are otherwise difficult to insure;
reinsurance captives in the European
• independence from insurance market Union and one of the largest in the
cycles;
world.
2
Luxembourg captive reinsurance
companies are authorised and
regulated by the Commissariat aux
Assurances (CAA). They must appoint
a Luxembourg domiciled manager who
is also subject to authorisation by the
CAA.
Information concerning the application
process, together with details of
direct and indirect taxes pertaining to
reinsurance captives can be found in
the final parts of this brochure.
Introduction
In recent years, the general economic
climate has generated an increased
interest in captive reinsurance. Faced
with new constraints and challenges,
it has become essential for companies
to master risks and their cost. Recent
developments in the insurance
and reinsurance markets have had
particularly hard consequences. While
the European insurance market has
shown constant growth in terms of
premiums, the coverage requirements
have considerably worsened for
companies having to face:
• high volatility in premiums;
• difficulty in finding cover adapted
to the risks resulting from their
activities;
• insurers’ refusal to cover some risk
areas;
• market capacity constraints;
• appearance of new risks or
intensification of existing ones.
Companies are confronted with an
escalating number of risks while,
at the same time, steadily growing
corporate governance requirements
result in additional rules relating to the
tracking and management of these
risks. The implementation of a risk
mitigating policy is now essential to
preserve the value of a company and
the confidence of its investors. These
constraints, combined with growing
competition, worldwide uncertainty
3
and increasing dependency on financial
markets force companies to search
for alternative solutions to control
and finance their risks. Among these
alternatives, the captive presents
numerous benefits, notably in terms
of the monitoring and reduction of
costs and the ongoing tracking and
integration of risk management policy
at a consolidated level.
Luxembourg
Captive reinsurance companies
The advantages of
creating a captive
The reasons for a company or a group
to create a captive are numerous
and can vary considerably from one
group to another, depending on its
objectives, location and activities. It
is nevertheless a common factor that
the long-term success of the captive
will only be guaranteed if this vehicle
is conceived as an active risk financing
tool.
Solution to market
inadequacies
The traditional insurance market
dictates restrictions to some
policies, particularly in difficult
market conditions. Companies thus
face considerable difficulty finding
protection against certain risks and
coping with the increase of their
risk retention (deductibles) and are
sometimes unable to find cover for
particular risks.
The captive provides the group with
tailor-made policies that can, for
instance, compensate for lack of
appropriate cover available in the
insurance market.
Reduction or stabilisation
of insurance premiums at
group level
Another reason for a company to
create a captive is to reduce and/or
optimise its risk financing expenses.
The often high price of insurance cover
results from intermediation costs
and cycles in the insurance market
which can provoke severe increases
in premium levels. Increasingly, this
has driven companies to consider
self-financing a greater portion of
their risks. One way is to increase
the level of risk retention on existing
insurance contracts by which the
company retains a first layer of risk on
4
each claim. The enterprise can thus
obtain reductions on its insurance
premiums, while remaining protected
against large losses. The use of a high
global retention is nevertheless limited
because the financial situation of
individual business units must be taken
into account. Local managers have
different requirements with regard
to the level of protection they need
and they generally choose to limit
the retention and maintain insurance
cover.
In such a case, the use of a captive
will enable the global economic
strength of the group to be taken into
consideration and allow an increase in
global risk retention above the local
deductible of the individual affiliates
and business units while offering them
adequate protection. The group will
thus benefit from the mutualisation of
its risks.
Finally, the captive gives the group
increased negotiating power with the
insurance market. Depending on its
capacity, a captive can progressively
cover larger amounts and limit the
volume transferred to the market if the
conditions offered by insurers are not
optimal.
Retention of the profits of
good risk management
Setting up a captive enables a
company to retain the profits of its
underwriting policy.
On the one hand, the mothercompany can choose to keep risks with
a good loss ratio within the captive
and achieve savings in the case of low
frequency losses, when premiums
retained are higher than losses.
On the other hand, the captive can
generate a potential reduction in
premiums. Commercial insurers
fix their premiums based on global
market figures using average statistical
risk and loss data. By possessing a
captive, the company will be able to
negotiate a price established on the
basis of its own undertaking specific
loss experience and will thus be less
impacted by fluctuations in the market
and downgrading due to the loss
experiences of other insured parties.
Optimisation of financial
flows linked to risk
management
Some risks cannot be transferred to
the insurance market and threaten
the financial performance and future
development of the group as they
are retained on the balance sheet.
In the event of a catastrophic claim,
the resulting loss will have to be
completely absorbed in the profit
and loss account and deducted from
profits. This potential increase in the
5
volatility of the group’s results impacts
the price of the shares and generates
an increase in financing costs.
By using a captive the group will
achieve adequate protection of its
balance sheet under Luxembourg
Generally Accepted Accouting
Principles (GAAP) which provide for
the constitution of a technical reserve
against future losses.
In addition, the captive enables the
company to keep hold of the return on
accumulated funds which is lost when
premiums are paid to an insurer. This
feature is particularly attractive when
the captive provides cover for risks
with a long life such as legal liability,
for which the period between a claim
and its final payment can last five or
ten years.
Luxembourg
Captive reinsurance companies
Direct access to worldwide Better risk management
professional reinsurers
A captive simplifies the centralisation
A further advantage of the captive is
that it provides direct access to the
wholesale professional reinsurance
market. The conditions offered by
this market can be more favourable,
since structural costs are lower for
reinsurers than for direct insurers and
the required premiums are usually
better adapted to the specificities of
each client.
In addition, the group can implement
long-term programmes with some
reinsurers for its major risks in order
to spread the risks over an extended
period of time.
of worldwide insurance programmes
and the collection of group risk data
(loss statistics, nature of the cover,
control measures, etc.). This in turn
enables risk to be managed at group
level, guarantees better risk awareness
at an operational level and increased
transparency with regard to insurancerelated costs.
In addition, centralised risk
management is crucial in order to
respond efficiently to information
requests from financial market
authorities regarding risks and risk
management reporting.
6
Why use a captive
reinsurance company?
Various solutions are possible for the
financing of risks, each resulting in a
higher or lower degree of retention or
transfer of risk.
If full transfer of risk provides the
enterprise with a reasonable level
of security, enabling the company
to improve its financial stability and
standing in the financial markets, it has
the major disadvantage of generating
considerable cost.
Self-retention
For this reason, companies are
Free cash flow
increasingly looking at the option
Reserves on balance sheet
of retaining their risk. The captive is
perfectly suited to finance an increase
in the risk retention of an enterprise
Alternative risk
or a group. It provides multiple
transfer solutions
Captive
advantages in terms of centralised risk
management, financing and control.
Insurance
Outsourcing of activity
Full transfer
Functioning of a typical captive reinsurance situation.
Capitalisation
Affiliate
Insurance
premiums
Claims
Mother
company
Affiliate
Insurance
premiums
Claims
Insurance
premiums
Claims
Direct
insurer
Direct
insurer
Direct
insurer
Insurance
premiums
Insurance
premiums
Claims
Claims
Insurance
premiums
Claims
Reinsurance
captive
Insurance
premiums
Claims
Insurance
premiums
Insurance
premiums
Claims
Claims
Investments
Financial markets
7
Professional
reinsurance
market
Luxembourg
Captive reinsurance companies
Why choose Luxembourg ?
Luxembourg is a fully diversified
financial centre with particular
strength in certain areas. It is the
second largest investment fund
centre in the world after the United
States, with 1,700 billion euros under
management, and the largest private
banking centre in the Eurozone.
Luxembourg is also the largest captive
reinsurance domicile in the European
Union. Companies from around the
globe have domiciled over 250 captive
reinsurance companies in the financial
centre. They have chosen Luxembourg
for a variety of reasons:
• Luxembourg is a stable democracy
with a strong economy and a neutral
position in the European Union;
• as a member of the EU and the
OECD, with a strong regulatory
environment focusing on investor
protection, it is attractive to
institutional investors;
• economic, social and political
stability ensure a secure legal and tax
framework;
• Luxembourg offers an attractive legal
framework for captive reinsurance
companies;
• Luxembourg’s unique multilingual
and multicultural workforce is
accustomed to working in different
jurisdictions and time zones.
The success of the financial centre
is grounded in the social and
political stability of the Grand
Duchy and on a modern legal
and regulatory framework that is
continuously updated, inspired by
regular consultation between the
government, the legislator and the
private sector. Thus, over the years,
specific regulatory frameworks have
been created for different financial
sectors, alongside rigorous anti-money
laundering policies.
This legal framework, combined with
Luxembourg’s openness to the outside
world, has attracted banks, insurance
companies, investment fund promoters
and specialised service providers from
all over the world.
Luxembourg is well placed in international surveys
• ranked the world’s least risky business environment (out of 203 countries).
Source: Global Insight, Country Risk Ratings, October 2008
• ranked 5th most competitive market (out of 55 countries).
Source: IMD Global Competitiveness Index, 2008
• ranked 15th freest economy in the world (out of 157 countries).
Source: Heritage Foundation: Index of Economic Freedom, 2008
• Luxembourg City is ranked 1st in the world for personal safety and 17th in
the world for overall Quality of Living (12th in Europe) out of 215 cities.
Source: Mercer Human Resources Consulting, Worldwide Quality of Living survey, 2008.
8
Captive solutions
in Luxembourg
Facts and figures
In 1984 Luxembourg adopted a first
legal framework for the establishment
and pursuit of reinsurance activities,
including captive reinsurance, both
within Luxembourg and abroad. The
law and its implementing measures
promoted the development of the
captive industry in Luxembourg by
setting the right balance between
strong prudential supervision and
the need to take into account the
specificities of captive business
compared to professional (wholesale)
reinsurers.
In 2007 this law was updated to
implement the European Reinsurance
Directive 2005/68/EC.
The Directive ensures the mutual
recognition of authorisations and
prudential control systems, thereby
making it possible to grant a single
authorisation that is valid throughout
the European Union, while applying the
principle of home country supervision.
The Directive also recognises the
specificities of reinsurance business by
setting adequate technical provisioning
requirements and providing for the
‘equalisation provision’ to enable
captives with a less favourable spread
of risks to build up technical reserves
financing their exposure.
The sector was an immediate
success, with an average of 10 new
captives licensed each year, while a
handful disappeared due to mergers
or cessation of business. With over
250 licensed captive reinsurance
companies, Luxembourg has become
the largest reinsurance captive
domicile in the European Union and
one of the largest in the world.
The following pie charts illustrate the
wide range of players in the captive
market, both in terms of country of
origin and market sector.
Country of origin of the parent
company
The Netherlands 10
Belgium 59
The Iberian Penisula 17
Other 23
Scandinavia 37
Germany 15
Sector of the parent company’s
activity
Food-processing 14
Insurance 48
Other 19
Distribution 24
Chemistry 19
Banking 37
France 68
Italy 12
Luxembourg 21
Source: CAA Annual Report 2007
9
Industry 80
Telecommunications 8
Transport 13
Luxembourg
Captive reinsurance companies
Legal framework
The legal framework for reinsurance
companies is guided by:
• the Law of 6 December 1991 on the
insurance sector, as amended;
of insurance and reinsurance
undertakings in an insurance or
reinsurance group;
• c ircular letters on reinsurance
published by the CAA.
These documents are available on
• the Law of 8 December 1994 on
the CAA website www.commassu.lu
annual and consolidated accounts, as
and on the Luxembourg for Finance
amended;
website (www.lff.lu) in the section
• regulations pertaining to the Law of 6 Actors / Captive reinsurers.
December 1991, in particular
- the Grand Ducal Regulation of 5
December 2007, which implemented
EU Directive 2005/68/EC, concerning
the conditions for authorisation and
carrying on business for reinsurance
companies, and
- the Grand Ducal Regulation of
5 December 2007 concerning
the supplementary supervision
Technical provisions
Luxembourg reinsurance captives
must establish sufficient technical
provisions in respect of their entire
business. The amount of these
provisions is determined following
rules laid down by law on the annual
accounts. Reinsurance captives must
set up a claims equalisation provision
10
to equalise fluctuations in loss ratios
in future years or to provide for
special risks. This provision includes
the equalisation reserve referred
to in Article 33(1) of EU Directive
2005/68/EC of 16 November 2005 on
reinsurance.
Luxembourg reinsurance undertakings
must at all times hold sufficient assets to
cover the technical provisions including a
claims equalisation provision.
The Grand Ducal Regulation of 5
December 2007 determines the
manner in which the provisions shall be
applied and, in particular, the absolute
minimum of the guarantee fund, the
nature of the underlying assets and the
basis on which, and the limits within
which, they shall be apportioned.
Actors in the captive
business
Supervision
Administration
Reinsurance captives operate in a
regulatory framework defined at EU
level by the Reinsurance Directive
(2005/68/CE) which was transposed
into Luxembourg legislation on 5
December 2007 by a law and a grand
ducal regulation.
Reinsurance captives are managed
in the Grand Duchy of Luxembourg
by a manager authorised by the
Commissariat aux Assurances. The
day to day administration of the
reinsurance captive is therefore carried
out in Luxembourg.
Control of the reinsurance captive is
the responsibility of the Commissariat
aux Assurances (CAA), the independent
auditor and the manager (dirigeant),
themselves both authorised by the
CAA.
Management will be undertaken
either by an authorised manager
within the reinsurance captive itself
or by employing the services of a
Luxembourg company specialised in
captive management.
During the ongoing life of the captive,
the company is required to comply
with a number of supervisory and
control measures.
The authorised manager must be
of good standing and professional
experience and must reside in
Luxembourg. The CAA may require
the manager to undergo tests in
order to establish his / her professional
experience.
11
The authorised manager is responsible
for the day to day management of the
company, including:
• acting as legal representative of the
reinsurance captive;
• liaison with auditors, fronting
companies, reinsurance companies,
banks, actuaries, etc.;
• reporting to the Commissariat aux
Assurances;
• company secretarial duties,
organising Board meetings, AGMs,
etc.;
• preparation of the financial
statements;
• tracking risk levels and reporting on
them to the Board.
Luxembourg
Captive reinsurance companies
Authorisation procedure
Prerequisites for
authorisation
With the implementation of the
European Reinsurance Directive into
Luxembourg law, a reinsurance captive
operating on a cross-border basis
in different European countries is
supervised only by its home country
supervisory authority (where the
undertaking is licensed). Hence any
reinsurance company which establishes
itself within the territory of the
Grand Duchy of Luxembourg must be
licensed by the Ministry of Treasury
and Budget before starting activity.
Summary of the process
From planning to launch, the process
generally takes between three and six
months.
Minimum guarantee fund
The law requires a reinsurance
company to maintain a minimum
guarantee fund of 1,225,000 euros for
reinsurance captives and 3,000,000
euros for professional (wholesale)
reinsurance companies.
Articles of incorporation
Once signed, the articles of
incorporation will be registered at a
local Notary.
Head office and central
administration
Captive reinsurance companies with
a head office in Luxembourg must
have their central administration on
Luxembourg territory and possess
sound administrative and accounting
procedures and adequate internal
control mechanisms.
Preparing the application file Share ownership
An application file for authorisation
must be submitted to the Luxembourg
insurance supervisory authority, the
Commissariat aux Assurances.
The quality of shareholders, who
directly or indirectly possess qualifying
holdings or holdings enabling them
to significantly influence the conduct
12
of the business, must be satisfactory
in view of the need to ensure
sound and prudent management
of the undertaking. In view of the
examination of the application file,
the following shareholder information
must be communicated to the
Commissariat aux Assurances:
• an organisational chart of the group
to which the undertaking to be
authorised belongs, including all
parent undertakings and affiliated
companies;
• the latest annual accounts of the
major and ultimate shareholders.
Authorisation shall be subject to
the transparency of the direct and
indirect shareholding structure of the
undertaking.
Board of directors/managers
The company must be administrated
by a Board of directors of minimum
three members. Their professional skills
and good standing will be examined,
based on biographical details and an
extract from the judicial record.
Authorised manager
The company must, by way of a
contract, secure the services of a
natural or legal person whom it shall
appoint to carry out its management
functions. Prior to assuming these
functions, the manager must have
received the authorisation of the
Minister. In order to be authorised
as the manager of a reinsurance
undertaking each natural person must
give proof of his / her good standing,
Decision
to start
the study
Group appraisal
of the interest of
a captive
high level of professional knowledge of
reinsurance matters and be domiciled
in the Grand Duchy of Luxembourg.
External auditor
A reinsurance undertaking must
submit its annual accounts to external
audit by an independent auditor
chosen from a list approved by the
Commissariat aux Assurances.
Business plan
The business plan must include a
presentation of the risks that will
be underwritten (i.e. the nature of
Decision
to create
the captive
Feasibility study
risks covered, policy period, insured
companies, activity of the insured,
policy limit, exclusions, etc.), together
with the projected level of premiums,
reinsurer’s share, fronting commission,
retrocession policy, pro forma threeyear financial statements, and
compliance with the EU solvency
regime.
Group’s
decisional
process
Start the business
1st Board meeting
Contracts issuance
etc.
Business plan
13
Review of
business plan by
authorities and
license
Luxembourg
Captive reinsurance companies
Tax aspects
Direct taxes
Net worth tax
Corporate income tax and
municipal business tax
Net worth tax is levied annually at a
rate of 0.5% on the company’s total
gross adjusted assets reduced by its
debts and liabilities (“unitary value”).
Luxembourg reinsurance companies
are fully liable to:
• corporate income tax on their
worldwide income at the rate of
21.84% (standard rate of 21%
increased by an employment fund
contribution of 4%), and
Withholding tax
A withholding tax of 15% is levied
on dividend payments, unless tax
treaties provide for lower rates or a
participation exemption regime applies
to reduce withholding tax to 0% (see
below).
• municipal business tax levied on
income of businesses operating in
Normal interest payments (i.e. non
Luxembourg (this rate is 6.75% for
companies established in Luxembourg profit-linked interest) are generally not
subject to withholding tax, unless the
City).
EU Savings Directive applies.
The corporate income tax rate should
be progressively reduced in the coming No withholding tax is levied on the
remittance of liquidation proceeds,
years.1
regardless of the tax status of the
recipient.
1D
eclaration made by the Luxembourg Prime Minister, Mr. Junker, during its State of the Nation speech
on May 22, 2008.
14
Participation exemption
Indirect taxes
Luxembourg tax law provides a
participation exemption for qualifying
investments held directly or indirectly
by fully taxable resident companies
(including reinsurance companies).
The exemption from income tax is
extensive, covering dividends, capital
gains and liquidation proceeds. In
addition, no withholding tax is due
on dividend distributions made by
reinsurance companies if certain
conditions are fulfilled and the value
of qualifying investments is generally
not included in total asset value for net
worth tax purposes.
Capital duty
Double tax treaties
Luxembourg reinsurance companies
benefit from the provisions of the
double tax treaties concluded by
Luxembourg. More than 50 such
treaties are already in existence.
Capital duty has been abolished as
from January 1, 2009 and has been
replaced by a fixed registration duty of
75 euros. This fixed registration duty is
due upon incorporation of Luxembourg
companies, upon amendment of the
articles of incorporation, or upon
transfer of the registered seat or
place of effective management to
Luxembourg.
VAT
Reinsurance companies are subject
to VAT, however most of their
activities are VAT exempt. Input
VAT is recoverable in proportion to
15
reinsurance premiums originating
from insurance companies located in
countries outside the European Union.
Tax on reinsurance premiums
Premiums related to reinsurance
policies are exempt from tax on
insurance premiums.
Luxembourg
Captive reinsurance companies
Useful contacts
In Luxembourg
AGERE (Association des Gestionnaires
de Réassurances), the insurance and
reinsurance managers’ association
c/o ACA
(+352) 44 21 44-1
aca@aca.lu
c/o
Association des Compagnies d’Assurances
du Grand-Duché de Luxembourg - ACA
www.aca.lu
Commissariat aux Assurances
(+352) 22 69 11-1
www.commassu.lu
CODEPLAFI : legal observatory
(+352) 29 11 39-1
www.codeplafi.lu
IRE (Institut des Réviseurs d’Entreprises)
www.ire.lu
Outside Luxembourg
European insurance and reinsurance
federation
www.cea.assur.org
Committee of European Insurance and
Occupational Pensions Supervisors
www.ceiops.eu
European Commission
ec.europa.eu/internal_market/insurance/index_en.htm
Luxembourg for Finance thanks the members of the
LFF Reinsurance Working Group for their work on
this brochure.
16
Luxembourg for Finance
Agency for the Development of the Financial Centre
Luxembourg for Finance a public-private partnership between the
Luxembourg Government and the Luxembourg Financial Industry Federation
(PROFIL). It consolidates the efforts made by the public authorities and
principal actors of the financial sector to ensure the development of
an innovative and professional financial centre through a coherent and
structured communications policy.
Thus Luxembourg for Finance will enhance the external
presentation of the financial centre, communicating
the advantages of its products and services to a wider
public and highlighting the numerous opportunities
available to investors and clients, whether institutional
or private, from around the world.
Luxembourg for Finance organises seminars in international financial centres and takes part in selected world
class trade fairs and congresses.
The Agency also develops its contacts with opinion
leaders from international media and is the first port
of call for foreign journalists.
Luxembourg for Finance
Agency for the Development of the Financial Centre
7, rue Alcide de Gasperi • P.O. Box 904 • L-2019 Luxembourg
Tel. (+352) 27 20 21 1 • Fax (+352) 27 20 21 399
Email lff@lff.lu • http://www.lff.lu
© LFF Januar 2009
www.lff.lu
7, rue Alcide de Gasperi • P.O. Box 904
•
L-2019 Luxembourg
•
Tel. (+352) 27 20 21 1
•
Fax (+352) 27 20 21 399
•
Email lff@lff.lu